Current EOPP Research:
Spatial Asset Pricing: A First Step
Andrea Prat (with François Ortalo-Magné, University of Wisconsin-Madison)
Abstract:
We explore the dual role of housing, as an investment vehicle and as access to a
location. Our dynamic stochastic model has four classes of assets: a risk free bond, houses (in various locations), stocks, and human capital (with different productivity
in different locations). Agents choose where they live and can invest in the financial
market and in all real estate markets. Local rents are determined in equilibrium by
the utility of the marginal residents, which in turn depends on city sizes, local labor
productivities, and local shock-insulation parameters. The dividend of a house is a
stochastic process that is determined endogenously by how local productivity shocks
affect marginal residents. The model leads to a closed-form representation of: (i) The
portfolio decisions of agents as a combination of an investment in a financial and real
estate mutual fund and demand in local housing to hedge the endogenous rent risk; and
(ii) The returns of financial and real estate assets in terms of the covariance matrix of
dividend shocks and local productivity shocks.
Related Paper
Spatial Asset Pricing: A First Step
